The Inland Revenue (IRD) has a piece of advice for cryptocurrency investors, pending it releasing specific guidance on how their incomes should be taxed.

It says people should treat money made buying and selling cryptocurrencies in the same, or similar, way they would money made buying and selling gold.

That is, pay tax on the profit made by selling a currency, only if that currency was bought with the intention of resale.

So if you buy units in a currency for $1000 and resell them for $1800, you’d pay tax on that $800 profit.

Yet if you could only resell your units for $600, your $400 loss would be tax deductible.

Other expenses may also be tax deductible.

The IRD has told interest.co.nz this comparison to gold “may be useful when considering the income tax treatment of cryptocurrencies”.

Yet: “If any customers need further guidance, we can discuss their particular circumstances.”

The information sheet on gold, the IRD has pointed interest.co.nz to, explains: “As with any personal property, amounts derived on the disposal of gold will be income under s CB 4 if the gold was acquired for the dominant purpose of disposal…

“Ascertaining what a person’s subjective purpose was at the time they acquired property is a very fact-specific assessment.

“The particular circumstances of the situation need to be carefully considered, and any assertion that gold was not acquired for the dominant purpose of disposal would need to be supported by clear and compelling evidence…

“[D]escribing property as being acquired as a long-term investment, a hedge against inflation, for portfolio diversification, or as a store of value outside the monetary system is not sufficient to negate a dominant purpose of disposal.”

The info sheet makes no mention of GST.

The IRD says: “Preparatory work is underway on issuing public guidance regarding the tax treatment of cryptocurrencies.”

However it can’t say when this guidance will be completed and what it might look like.

Nor can it comment on the extent to which it is actually enforcing its tax advice in the interim - none of which has even been put on its website.

Challenges and opportunities

Auckland University’s Commercial Law Head of Department, Alex Sim, says she has been approached by a number of people from overseas, curious as to why a technologically advanced country like New Zealand doesn’t have guidance on taxing cryptocurrencies.

She believes there might be a natural reluctance from the Government to be seen to be endorsing cryptocurrencies, due to all risks posed by trading them.

Yet she’s concerned authorities’ silence on the matter is only forcing investors to move overseas, where they are even less protected.

Sims recognises that taxing income derived from cryptocurrencies will have its challenges.

It might be difficult to keep a record of a large numbers of small trades for example. And trying to ascertain whether investors - early adopters in particular - bought currencies with the intention of resale can be complex.

Sims also recognises there will be people who will deliberately try to game the system, but believes this isn’t a reason to not have a system at all.

She isn't sure how much taxable income New Zealand traders would have made to date, as a number of people would've made gains on paper, but wouldn't have sold up and cashed these in.

What other tax authorities are doing

Deloitte tax partner, Ian Fay, has written a piece explaining how other countries are also grappling with how to tax cryptocurrencies.

He says: “In the United States, the IRS has released guidance that cryptocurrency is property when held on capital account, and gains are subject to capital gains tax. Miners of currency should pay tax on the value of the currency they receive.

“Similarly, both the UK and Australia tax gains from the sale of cryptocurrencies under their capital gains tax rules.

“In terms of GST, buying cryptocurrencies and then using them to buy other goods and services could result in double tax. The purchase of the unit of cryptocurrency would be subject to GST, and then any subsequent purchase with the cryptocurrency would also be subject to GST.

“Deeming cryptocurrencies to be currency for GST purposes would remove GST from the sale or purchase of any units, solving the double tax problem.

“Australia is moving to treat cryptocurrencies like a currency for GST purposes (from 1 July 2017) for this reason.”

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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41 Comments

So financial engineering of tax write offs using cryptos is acceptable to IRD. Probably the dumbest move yet by IRD by creating an easily method of accruing tax refunds while making undeclared gains. Gains that they will have no way of demonstrating are associated with any individual or entity.

A bit harder to argue a capital gain was not the dominant purpose of buying bitcoin as unlike real property (rent) or shares (dividends) the only income generated is the capital gain. This is why IR has likened bitcoin to gold bullion.

Luckily there's plenty of coins which do generate an income. It'd be hard to argue the intent of buying these coins wasn't for income purposes in that case. The capital gains would then be a cherry on top, just like rental properties.

In a retail sense you are probably correct, it is used as a source of speculation.

But crypto currencies can also be used in supply chains (of goods) and in this context is used in a business sense and the crypto currency is only there is provide certainty, control and fast response in payment. In this context it ir being used more like a tool.

"But crypto currencies can also be used in supply chains (of goods) and in this context is used in a business sense and the crypto currency is only there is provide certainty, control and fast response in payment"
actually no, you got that confused with blockchain and the existing payment networks which even a small NZ company can make more securely and handle hundreds of transactions a second. Cryptocurrencies either would do nothing in supply chains or be a downgrade in the payments industry.

I agree, there is the downside. you see a business normally cannot accept the currency and hold it, they need to pay GST etc. So they need to convert it at some point and due to the extreme volatility and to ensure they are prepared to handle any returns, outgoings etc they would need to convert it pretty soon after. On that basis the business is losing a lot in the transaction cost. So either the customer takes a huge fee hit or the business takes a huge fee hit, neither which can be returned. It was for this reason companies offering much smaller transactions e.g. like Steam, dropped it and will wait till: the transaction speeds and throughput goes up , the fees drop, the volatility drops, and the support increases. However given the volatility is dropping a wee bit and in some cases the higher % of fees can be bourne by the customer and not the business, it may come back into favour. Not good for the regularly paying customer but hey it was not designed to be good for the average person making day to day payments. Otherwise they would have fixed the crippling scaling issues years before.

Fascinating IRD sheet with all the real-world examples including peoples motivations. All the people that purchased it back in 2009, if only they knew that central banks would wage bloody war on gold dropping billions in naked shorts during the small trading hours to smash the price lower. "Don't touch this you peasants - this is central bank collateral! But something like bitcoin, which is dog shit by comparison can increase in value thousands of percent. Why? because it's manipulated too, but it's manipulated upwards by not downwards. I wonder if Muammar Gadaffi would have ended up on the back of a ute impaled with a knife, and his country destroyed if he'd decided to trade oil in bitcoin backed dinars instead of gold backed dinars. Interesting old world we live in.

If you were to purchase foreign currency with intentions to travel, then at a later date sold it back and made profit on this, are you expected to pay tax? No expert here, just curious. The point about intention is fairly ambiguous.

In this case the intention was to use it as currency (a medium of exchange) and any change in price was incidental to this. If you buy and hold and then sell later for a profit, this is trading and liable to income tax. These rules already exist for FX.

It's also likely that the size of the transaction for personal spending is an orders of magnitude smaller than an investment.

Then the speculation & cryptocurrencies are of little interest as they are embarrassing technically, and the exchanges are too close to cowboys and bandits to liken as heroes from financial corruption. If anything it is a good example of how not to run technical development and just let the media drive demand.

Good gravy deployment and testing on live prod servers, then repeatedly muffing it with bugs so orders and withdrawals are cancelled and held... consider my technical estimates permanently lowered https://news.slashdot.org/story/18/01/13/0955237/cryptocurrency-exchange... These guys should not be in charge of a blog or even a game server... yeh gods perhaps that was their last training.

Bit of a spit take there.Why not become an entrepreneur. There is plenty of space in the garage for a new project... like most the major tech businesses today. Sure it is playing the odds, but unlike cryptocurrencies these odds have value in research and development. Even running a small business can land someone into the dizzying heights of the "fat cats".

Treating as bullion fair enough, better than attempting to tax each individual trade at the exchanges. When the banks finally grow-up and stop closing accounts when a whiff of BitCoin is in the air, I can see them being asked to apply a withholding tax on the incoming fiat from ''approved/known' exchanges. Crypto used for personal purchases will become a bigger part of the economy, where retailers will either need to declare, or slip under the mattress like our cash economy does now. Interesting times.

"When the banks finally grow-up and stop closing accounts when a whiff of BitCoin is in the air, I can see them being asked to apply a withholding tax on the incoming fiat from ''approved/known' exchanges"

Why would the banks go along with that, it would cost them money and time, its easier for them to just shut the accounts down rather than risk falling foul of KYC/AML and then added tax requirements.

"Why would the banks go along with that, it would cost them money and time, its easier for them to just shut the accounts down rather than risk falling foul of KYC/AML and then added tax requirements."

The banks will go along with it because IRD will tell them to do it.

Think it's in any interest (the banks) to have them take off interest withholding tax now?
Banks will designate crypto-trading accounts, do due diligence and charge accordingly.
IRD are clearly thinking about the whole Crypto thing now, at least they're not sticking their head in the sand over it.

Banks don't have a choice for normal RWT, they had to do it or close all their accounts and go out of business. Shutting down crypto trader accounts wont send the banks out of business, its the cryptocurrency users that are trying to put banks out of business (not that they'll succeed in my lifetime).

the only way banks will play along is if they load enough fees onto it to make it worth their while.. which sorta eliminates the whole point of crypto.. to get around banks and fees and govt oversight.

Didn't BitPay et al have a lot of issues with it? Card limits only to $1000 USD, storage in converted USD not in cryptocurrency like BTC, high fees, lack of customer protections etc meaning the provider was dropped on the head in Europe... Essentially best bet is to stick to online for now, perhaps switch to a faster transacting currency on an exchange at a extremely low fee rate and for a business to use coinpayments which accepts 105 cryptocurrencies. No matter what is chosen refunds are still a bit messed up.
Essentially I could blow over a couple of grand at a weekend PB tech shopping or travelling, and the converted currency means it offers quite a negative to an existing debit card which is fee free on purchases... I.E. better to do a cryptocurrency low fee withdrawal to local bank account and then spend as normal. Pick a good currency and it is faster than straight Bitcoin, (not waiting for days or holding a BitPay fiat based card which does not accurately hold value).